Fitch Maintains BG Energy on Rating Watch Negative

Reuters, Thursday 25 Apr 2013

BG's lowered production outlook due to in part to less effective than expected compression project in Egypt

(The following statement was released by the rating agency)

Fitch Ratings has maintained UK-based BG Energy Holdings Limited's (BG) Long-term Issuer Default Rating (IDR) of 'A' and Short-term IDR of 'F1' on Rating Watch Negative (RWN). A full list of rating actions is below.

Fitch expects to resolve the RWN in June 2013 following BG Group's strategy presentation which is scheduled for May 2013. Fitch will need to assess the impact of the November 2012 downward revision of the output growth on the company's capital expenditure programme and production strategy over the next two to five years to resolve the RWN. As the company's credit metrics are high for its current rating, continuous ambitious investments coupled with failure to deliver on set production targets would likely result in a downgrade.

Key rating drivers

Small Compared With Peers

Although BG operates on a smaller scale than its similarly rated peers, Fitch considers its favourable cost position and history of production growth as mitigating factors. The lowered production outlook is due to several challenges facing BG ranging from delays or shutdowns in the North Sea, a less effective than expected compression project in Egypt, an extended schedule for the tie-in of wells for the next two FPSOs in Brazil and scaled back drilling in the US due to low natural gas prices.

Credit Metrics To Worsen

Fitch projects a deterioration in BG's funds from operations (FFO) adjusted net leverage to about 2.5x in 2014, up from 1.6x at end-2012, based on the agency's oil and gas price deck that assumes a gradual decline in oil prices from USD100 per barrel in 2013 to USD85 per barrel in 2015. This deterioration in leverage is due to the company's growth strategy and large planned capex, mostly related to its projects in Australia and Brazil.

Asset Sales

BG aims to lower the negative impact of its ambitious capital expenditure on credit ratios through asset sales. This mostly relates to the disposals of transmission and distribution assets and the sale of a stake in the Australian Queensland Curtis LNG project to China National Offshore Oil Corporation for USD1.93bn. BG has now completed or reached asset sales agreements that should release approximately USD8.1bn of capital by end-2013.

Production Key

Fitch believes that slower than expected production expansion could heighten the inherent execution risk in BG's operations as the company aims at a substantially larger than industry average increase in hydrocarbons production by 2015. BG is also exposed to potential delays and cost overruns due to the large projects currently being implemented.

Rating sensitivities

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Expectations of through-the-cycle FFO-adjusted net leverage markedly exceeding 2.0x on a sustained basis.

- Delays in key projects that significantly affect the likelihood of BG meeting its long-term production growth targets, and substantial cost increases for major projects.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Fitch could resolve the RWN if projected credit ratios were better than currently expected by the agency, for instance driven by a reduced capex plan.

- In the longer term, a re-established track record of meeting production targets could lead to rating stabilisation.

Liquidity and derb structure 

BG's liquidity position at end 2012 comprised USD4.4bn of cash and USD5.2bn of unused committed long-term facilities. This liquidity was sufficient to cover short-term debt obligations of USD1.1bn. The asset sale plan provides additional liquidity. In November 2012, the company signed a new five-year USD3bn syndicated committed credit facility, which replaced USD2.3bn of expiring bilateral committed credit lines.

Full list of ratings

BG Energy Holdings

Long-term IDR: 'A'; Rating Watch Negative

Short-term IDR: 'F1'; Rating Watch Negative

BG Energy Finance Inc.

Short-term Rating: 'F1'; Rating Watch Negative

BG Energy Capital plc

Senior Unsecured: 'A'; Rating Watch Negative

Short-term Rating: 'F1'; Rating Watch Negative

Subordinated Hybrid Debt: 'BBB+'; Rating Watch Negative

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